Andres Oppenheimer

Venezuela’s likely default could teach you a lesson: Don’t invest in dictatorships

FILE - In this Oct. 17, 2017 file photo, Venezuela's President Nicolas Maduro speaks during a press conference at the Miraflores presidential palace, in Caracas, Venezuela.
FILE - In this Oct. 17, 2017 file photo, Venezuela's President Nicolas Maduro speaks during a press conference at the Miraflores presidential palace, in Caracas, Venezuela. AP

A lot of people who have made a lot of money investing in Venezuelan bonds in recent years may get badly hurt if Venezuela’s dictatorship defaults on its foreign debts, as many market analysts say may happen shortly. But I don’t feel sorry for Venezuelan bondholders.

If the default occurs, they’ll only be getting what they deserve. And as an added bonus, the spectacle of a Venezuelan default — the first by a major country since Argentina’s in 2001 — would help convince investors across the world that it’s not good business to invest in state-run companies of repressive regimes.

Venezuelan President Nicolás Maduro recently announced that he will restructure his country’s debts, including those of PDVSA, the state oil monopoly that is about the only source of the country’s income. People who bought PDVSA’s bonds got annual yields of above 14 percent, more than three times what you get from most corporate or municipal bonds.

But few major international creditors are likely to accept Maduro’s offer to restructure their payments in defiance of U.S. sanctions that largely prohibit them from doing so.

And bondholders will be even less willing to talk with the man Maduro appointed as Venezuela’s lead negotiator: Vice President Tareck El Aissami. The U.S. Treasury Department on Feb. 13 designated El Aissami as a “drug kingpin,” and stated that “U.S. persons are generally prohibited from engaging in transactions or otherwise dealing” with him.

On top of that, there is little incentive for foreign creditors to negotiate, because chances that the current Venezuelan regime would be able to return their money are slim.

Venezuela, until not long ago one of Latin America’s richest countries, has become an economic and social disaster zone. The economy has plunged by more than 30 percent over the past three years and inflation is projected to reach 2,300 percent — the world’s highest — next year, according to the International Monetary Fund.

Many people have asked me why Maduro, who claims to be a socialist, kept paying bondholders in recent years instead of using the money to pay for desperately needed food and medicine imports.

The first reason is that, unlike in Argentina’s 2001 default, Venezuela has many oil-related foreign assets that creditors could grab, including the Citgo oil company in the United States.

The second reason, which is less known but an open secret among U.S. traders, is that most buyers of Venezuelan bonds have been the so-called “enchufados,” or “plugged in” members of Maduro’s ruling elite and their business cronies.

Whenever Venezuelan bonds plunged amid international expectations that Maduro would default on the country’s debts rather than cancel all food imports, Venezuelan officials and their cronies in the business world would buy PDVSA bonds for 20 or 30 cents to the dollar, with inside information that Maduro would not declare a default.

Then, once Maduro announced that he would honor Venezuela’s obligations, PDVSA bond prices soared, and the Venezuelan officials and their friends would sell them for 40 or 50 cents to the dollar. That’s one way they’ve made billions of dollars in recent years.

But now the game is over because Maduro has run out of money to pay Venezuela’s creditors. The people who most stand to lose are the “plugged in” Venezuelans who benefited from this scheme, a few unscrupulous banks and some extremely selfish private investors.

We should not cry for them. As Nathan Sandler, president of the emerging markets investment firm Ice Canyon, told me, “Holding Venezuelan government bonds was providing vital support for an increasingly dictatorial regime.”

Venezuela’s default would send a strong signal to investors across the world to stay away from regimes such as Venezuela’s. There are growing numbers of money managers and firms that offer Socially Responsible Investing (SRI) or Environmental, Social and Corporate Governance (ESG) investments.

According to the US SIF Foundation, a group that promotes socially responsible investments, there are more than 1,000 funds that take into account SRI principles in the United States, many more than there were a few years ago. “We are seeing the space grow,” US SIF Foundation research director Meg Voorhes told me.

If Venezuela goes into default, it will be one more reason to seek socially responsible investments — even when dictatorships such as Venezuela offer us seemingly magic 14 percent annual yields.

Watch the “Oppenheimer Presenta” TV show Sundays at 9 p.m. on CNN en Español. Twitter: @oppenheimera